Italy's dominant aerospace company, Finmeccanica has gone from state-owned industrial conglomerate to privately run aerospace and defence player in a few years. But can it turn a flurry of acquisitions and strategic alliances into shareholder returns and hold its own against rival EADS?

Like its European rival EADS, it may be saddled with a cumbersome and confusing name, but visitors to July's Farnborough air show could have had no doubts about Finmeccanica's intention to announce its name loudly on the global aerospace stage. The Italian giant's chalet - with its sleek, metallic Ferrari red frontage - appeared to symbolise Finmeccanica's transition from anonymous, state-controlled conglomerate to profitable, privately owned and bullish aerospace and defence manufacturer.

The owner of most of Italy's best-known aerospace names - including Aermacchi, Aeronavali, Agusta, Alenia and Galileo Avionica - wants to be a recognised brand in its own right and has been taking its still-developing "restructuring story" to potential investors in New York, London and elsewhere in a series of roadshows. The first two cities are key, not just because they are the world's main financial centres, but because Finmeccanica is becoming a big aerospace player in the USA and particularly the UK, where its purchase of GKN's 50% stake in their AgustaWestland joint venture will, when completed this year, make it one of the country's biggest defence contractors.

It has been a remarkable turnaround for a company that less than a decade ago was an industrial basket case, burdened by bad investments, political interference and a virtually unmanageable spread of businesses. Reinventing itself as a high-tech group focusing on communications, defence and aerospace, Finmeccanica sought refinancing in 1998 from a consortium of banks and, in 2001, more than two-thirds of its shares were floated on the Milan stock exchange. Although the government held on to a 32.4% stake, no other single shareholder now holds more than 1% of the stock.

The company, under chairman and chief executive Pier Francesco Guarguaglini, plans to get rid of its remaining non-core businesses by next year and focus on aerospace and defence. These non-core businesses, transport, energy and IT, made up 28% of its €8.6 billion ($10.8 billion) revenues in the last financial year.

Acquisition cash

The target is to boost aerospace and defence sales from €6.3 billion to €10 billion by 2006. "This is the level at which we will feel comfortable in terms of the sort of global reach we need," says senior vice-president of business development Alberto de Benedictis. "It will give us the cashflow generation we need to make plug-in acquisitions."

Finmeccanica has taken steps to achieve its €10 billion target and the UK is crucial to its plans. As well as its £1 billion ($1.82 billion) purchase of the half of AgustaWestland it did not own - a move which should add about €1.4 billion to its revenues - Finmeccanica has concluded long-running discussions with BAE Systems on a structure for their fledgling Eurosystems defence electronics partnership (Flight International, 26 October-1 November). It will see Finmeccanica acquire BAE's secure communications business in the UK, 75% of the two companies' pooled avionics units and the UK air-traffic management business of joint venture AMS. The move will add €1 billion to its revenues in 2005. Together with the AgustaWestland buyout, it will make Finmeccanica the UK's second biggest defence firm, with 10,000 employees and UK sales of about €2.6 billion. It also means the UK will vie with Italy as Finmeccanica's most important market.

EADS's entrenchment in France, Germany and Spain means that the other target for Finmeccanica is the USA. Although North American sales make up only 5% of the company's revenues, the growing importance of the UK has meant that "our whole perspective has changed and we are more focused on the Anglo-Saxon world", says de Benedictis. In early October, Guarguaglini said he had €1 billion to spend on small- and medium-size acquisitions in the US market, most likely in defence electronics. "We need a domestic [US] capability for access for our own products and possibly to provide product enhancements for our companies internationally," says de Benedictis. "But they're not going to be big. We are looking around for complementarity. You are not going to go to the USA and build greenfield operations. You have to buy into the industrial base."

US visibility

The company's visibility in the USA has improved since the formation of Washington DC-based Finmeccanica Inc in 2002, says Stephen Bryen, president of the US arm and a former US undersecretary of defence. "When we opened the office they couldn't say the name. Now our recognition in the defence community is very good," he says. "We are here as a serious partner with US companies in several major programmes - the Joint Strike Fighter being the most important."

Finmeccanica's task in the USA is to establish trust with the customer, says Bryen. "One problem Italy uniquely had is that relations with clients here in the US were staccato-like. They were not constant and nurtured. That did not make the customer happy." The answer is to create analogs of the Italian companies in the USA. These include Washington DC-based Alenia Aeronautica Inc, which is growing rapidly as it works with Lockheed Martin to develop the JSF and promote the C-27J transport to the US Army and National Guard. Oto Melara Inc has been formed to offer a new super-rapid naval gun and the DART gun-launched guided projectile to the US Navy and Coast Guard. A US arm will be set up soon for Finmeccancia's defence-electronics business. "These give us the platforms we need to conduct business in the USA, whether it is teaming on bids or joint ventures," says Bryen.

Agusta, now AgustaWestland, has had a US presence for many years. The US Coast Guard uses the A109 and its A119 - assembly of which has been moved from Italy to Philadelphia - is flown by several police departments. The AB139, developed under the Bell/Augusta Aerospace joint venture in which Finmeccanica has a 45% stake, has been selected for the Coast Guard's Deepwater re-equipment programme.

AgustaWestland, with joint venture partner Bell and prime contractor Lockheed Martin, is bidding for the VXX presidential helicopter contract with the US101, a US-manufactured version of the Anglo-Italian EH101. "The US helicopter market will be the fastest growing in the next 10 years," says de Benedictis, who has the additional role of adviser to the chairman on UK and US expansion. "We plan to enter that market aggressively with military helicopters and base ourselves there in production terms."

Space link

Finmeccanica is keen to forge a strategic partnership in the space business. With the downturn in the telecommunications market, the company's satellite businesses have suffered along with those of its rivals. Finmeccanica's satellite manufacturing unit, Alenia Spazio, and its satellite services operation, Telespazio, contributed only 9% to revenues and 1% to profits last year. In a similar initiative to its Eurosystems venture with BAE, Finmeccanica in June agreed with French company Alcatel, Europe's market leader in satellites, to form two new sister companies, merging Alenia Spazio into Alcatel's industrial business, with Finmeccanica as junior partner, and Telespazio with Alcatel's operations and services unit, this time with the Italian company as majority shareholder. The two companies say the alliance will deliver synergies and economies of scale in research and development, procurement and industrial efficiency.

Finmeccanica's road to recovery has not been without bumps. In September, Roberto Testore, who shared the chief executive role with Guarguaglini and was the main face of Finmeccanica, resigned suddenly. It prompted speculation of a spat between the two men over the direction of the company. Within two weeks, Finmeccanica announced a new senior management structure, which sees Alenia chief executive Giorgio Zappa promoted to general manager, reporting to Guarguaglini, and in direct charge of all the operational businesses except defence electronics.

That division is run by a co-general manager, Remo Pertica, who reports to Zappa. A second co-general manager, Alessandro Pansa, is responsible for the internal departments, such as finance, legal and business development, and reports to Guarguaglini. The shake-up is intended to "provide more operational expertise at holding-company level", says de Benedictis. "They will support our transformation from financial holding company to an industrial and strategic company. We are bringing expertise upstairs and the authority and relationships they have will give an added value to our relationships with business." It also means that more decisions on investment and business priorities will be taken at head office, says de Benedictis. "We are not taking authority away from individual businesses, but their destiny cannot be their decision."

Not all are convinced that Finmeccanica has yet got its destiny right. In an October research paper, Banc of America Securities warned that the company's "transformation strategy execution" has been "slow, sometimes faltering", adding: "It needs to demonstrate that it can close its joint venture deals with BAE Systems and Alcatel... and sell its non-core activities. All of these appear to be mired in delay to differing degrees." The report also points out that Finmeccanica's presence in the USA, is, at less than 5%, too weak.

Common culture

Whether Finmeccanica's new head-office generals can co-ordinate their ground troops to deliver the growth and profit objectives remains to be seen. The team at the top will want to ensure opportunities for cross-business efficiencies between Finmeccanica's diverse operating companies are not wasted due to a lack of co-ordination from the centre. It is partly why the group has established corporate offices in Washington DC and London and why it is, for the first time, trying to create a Finmeccanica identity. "We have some valuable company logos with a lot of history," says de Benedictis. "But we want to develop a common culture that will percolate through the individual businesses. We've never had this Finmeccanica culture before."





Source: Flight International